Sooner or later most business owners reach a point when they start thinking about moving on. There are several ways to exit a business. You could sell it as a going concern, pass it on to family members or other stakeholders, or simply sell off the assets and stop trading.
If your plan is to sell, managing the factors that contribute to value should be the cornerstone of your business plan. A successful outcome will require active management and a well-planned divestment process.
Is there a Value Gap?
If you are depending on your business to fund your retirement, or perhaps fund your next venture, you need to have a thorough understanding of how much money you’ll need for this next stage of your life. The difference between the present market value and the target value of your business is known as the Value Gap. Knowing this well in advance will allow enough time for you to implement value creation strategies to build your business to the value you need.
Getting your house in order
Most purchasers will undertake extensive due diligence on your business. If you understand what the likely purchasers are looking for, you have the opportunity to ensure that your business is positioned the best possible way. This may mean cleaning up your balance sheet or sorting out other parts of the business in advance of the sale. This way, you remove any value leaks and improve your chances of achieving a favourable sale price.
1. Profit margins
Buyers want to see healthy margins and a predictable stream of income. Take a close look at your product/service offerings and ensure that you are aware of the profit margin of each item. This means looking at purchasing or supplier costs, and then the mark-up you are passing onto the customer.
Unmonitored expenses can also be a cause of profit bleed. Often when a business is experiencing strong sales they’ll have some cash flow breathing space and expenses go unmonitored. It is not until the business may face shortage of work that the owner starts looking for ways to cut costs. Keeping a close eye on expenditure at all times, not just when cash flow is tight, is vital to the health of your business.
2. Strength of brand
Your business should have a clear value proposition and compelling offer. Positive brand equity allows you to charge more for your product or service, because people are willing to pay a premium for your name—just as they pay a premium for jewellery that comes in a little blue box or electronics with an apple logo on top.
Customers are not only willing to pay more for a product with strong brand equity; they’re also willing to stay loyal to that business over many years. This kind of brand loyalty increases the value and marketability of your business.
3. Systems and processes
Work towards creating a workplace that is based on systems and which isn’t reliant on the owner to maintain performance. Sole traders or small businesses will find this harder to overcome. However, as you grow, ensure you place importance on refining the systems and processes in your business. Ensure your systems are documented, implemented, followed and continuously improved.
4. Quality customers
Choose your customers wisely – good customers tend to attract more good customers, and vice versa. Be wary of chasing the money and exposing yourself to volatile customers or poor payers.
Also, keep in mind the old adage “don’t put all your eggs in one basket.” Depending on a small customer base for most of your revenue makes you vulnerable. What if they change leadership and the new management goes in a different direction? What happens if they go bankrupt? Well-positioned businesses mitigate this risk by having a diversified and broad customer base thus making their business more stable and more valuable to a potential buyer. You can read more about finding new customers in this article.
5. IT systems
Quality IT systems are the backbones of most businesses. Investing early in reliable infrastructure will facilitate the smooth running of your business. If your IT is in disarray, expect to lose buyer confidence.
6. Experienced workforce
Dedicated and experienced staff can be a key asset in the eyes of a buyer. Key staff who have helped you create a valuable business are themselves an important part of that value. Strengthen your team through selective recruitment and training. Look for staff who will create value for your business, and managers with the skills to help you manage growth and achieve best practice. Clearly communicating your vision and strategy to staff will also help to motivate staff and gain their buy-in to value-adding goals.
7. Potential revenue
Buyers want to see potential and will be more interested if you can demonstrate that your business has capacity for growth, or that can be scaled up. For example, if you develop good business systems and operating manuals, you can show buyers that the business has the potential to become a franchise, expand into other geographical locations or acquire smaller competitors.
8. Financial management
Know what the critical numbers are and how they affect your business. Having a clear understanding of your business’ financial performance, and meticulous record keeping, will not only help your bottom line in the short term but demonstrates to a potential buyer that the business is well managed and that finances are kept in check.
9. Less reliance on YOU
When considering the value of your business, you need to take yourself out of the equation. Your business should be an asset you own, not an extension of yourself. It should be able to operate without your daily involvement or leadership. If the business cannot function without you, it is going to be a major problem for a new owner.
Marsh & Partners business advisors are forward-looking specialists with industry expertise to help identify and mitigate value disruptors. We work alongside you all year, not just at tax time. To find out how we can assist you with valuations, exit planning strategies and value improvement plans, talk to a Marsh & Partners advisor. You can reach us on (07) 3023 4800 or at firstname.lastname@example.org.